House of Representatives Committees

Chapter 3 Explanations for IT price differences

3.1In chapter 2, the Committee concluded that Australian consumers and
businesses do pay higher prices for many IT products when compared to
comparable products sold in the United States. The terms of reference for this
inquiry ask the Committee to investigate possible reasons for these price
differences.

3.2The Committee has never entertained the notion of a single explanation
for higher IT prices. The Committee has sought to examine the reasons given by
business, consumers and other observers for the higher prices paid by
Australian consumers for IT products and services.

3.3It is clear that a range of factors are involved and that these vary in
effect from product to product. However, the Committee does consider it possible
to draw conclusions about the validity and relative importance of the main
explanations for the pattern of IT pricing in Australia.

3.4Industry groups and the majority of IT companies have argued that higher
prices are caused by a range of factors which vary significantly depending on
the market and the product and services in question. In addition to arguing
that price comparisons are an unreliable measure of the value they provide to
consumers, industry groups have argued that price differentials for a number of
IT products are narrowing.

3.5Mr Russell Zimmerman, Executive Director of the Australian Retail
Association (ARA) noted that there was evidence of ‘a substantial deflation in
electronics and of software price reductions’, much of which could be attributed
to changes in the value of the Australian dollar. Mr Zimmerman nonetheless
noted that:

… there are still clear disparities on many products and
services. The real question is what do we believe is causing these? We believe
some of the reasons for this are tariff application and parallel importing,
regulation, wages and supply chain.[1]

3.6The Australian Information Industry Association (AIIA) attributes high
prices to general factors such as ‘local costs of doing business, retail
support requirements, distribution chains and statutory and regulatory imposts’,
as well as shipping costs, ‘training and marketing costs, again directly
related to the cost of staff … [and] distribution costs, particularly in terms
of import tariffs and coverage across a low density geography’.[2]
Ms Suzanne Campbell, CEO of the AIIA, argued that prices for a range of IT
products were falling:

The Canon Consumer Digital Lifestyle Index—2nd Half
2011 reports that the average selling price for digital devices at
Australian retail stores continued to fall, dropping 13½ per cent across all
reported categories. This price decline sharply contrasts with overall
inflation of 3.1 per cent.[3]

The Committee notes that Ms Campbell’s
claim does not address whether prices for these products were falling relative
to prices in the US, just that they were falling.

3.7Initially, this chapter considers some general issues relating to price
discrimination, including who sets prices of IT products. The Committee notes
that there is no single agreed position among industry bodies. Several general
reasons proposed by industry are then explored, namely claims about:

ndifferences in
advertised prices

nrelative market size

nwages and occupancy
costs

nwarranties and green
schemes

nexchange rates

nchannel partners, and

nlocalisation costs.

3.8The chapter then considers some responses from representatives of major
industry sectors and vendors to claims made by consumers, especially with
regard to digitally delivered content. The chapter then concludes by surveying
a range of industry views about how business operates in the current IT
environment.

Responsibility for international price discrimination

3.9The Committee heard a range of evidence in relation to who sets prices
for IT products, although few substantive submissions on this issue were
received from individual IT retailers, nor did the ARA directly address the
issue. While not seeking to revisit the comprehensive 2011 report of the
Productivity Commission into the Retail Industry, the Committee notes that
price discrimination can occur at various levels, against retailers at the
distribution level:

Specifically, this discrimination is in the form of brand
owners or international suppliers/manufacturers charging higher prices to
Australian retailers relative to the prices they charge to similar retailers in
other regions. These comparatively higher international supplier prices are
then passed on to consumers.[4]

3.10The Committee also notes the observation in the Productivity Commission
report that:

It is clear that international price discrimination is being
practised against some Australian retailers, to the detriment of Australian
consumers.[5]

Addressing perceptions of price discrimination

3.11As noted earlier, the Committee is aware of many areas where industry
explanations for significant price differences generally relate to the cost of
doing business in Australia. These are described below, before a more detailed
discussion of matters relating to digitally delivered content.

Advertised prices

3.12The Committee acknowledges that some confusion about pricing exists
because of different rules in various jurisdictions about including tax in
advertised prices. In Australia, advertised prices must include GST, while in
the United States advertised prices do not include sales taxes, which may
differ across state jurisdictions. Mr Tony King, Vice President of Apple
Australia, advised that:

When comparing prices it is important to remember that the US
retail prices do not include sales tax. Here in Australia, of course, a price
includes a 10 per cent GST. That fact alone is responsible for a great deal of
confusion and has resulted in some inaccurate conclusions regarding our
pricing.[6]

Market size

3.13In broad terms, industry groups and IT companies argue that Australia’s
economy is smaller than many comparable markets and that Australia is therefore
a higher-cost environment in which to do business. Mr Zimmerman observed
that:

Australia is really a very small player in the global retail
landscape, less than two per cent. In this respect, Australia is not able to
leverage the same economies of scale as is often enjoyed by other markets such
as the US or UK.[7]

3.14The Department of Broadband, Communications and the Digital Economy
(DBCDE) acknowledged that while Australian consumers are heavy users of technology,
the small size of the Australian market may contribute to higher prices than in
larger markets overseas:

In comparison with other regions, Australia is not a major
market for software and hardware. With a relatively small population, it cannot
support the level of competition found, for example, in the US, which has about
14 times the population and about 15 times Australia’s GDP.[8]

3.15Microsoft noted that, while it only provides ‘guidance’ on recommended
retail pricing to its channel partners, its guidance:

…is impacted by market forces including but not limited to
the size of the market, which affects supply and demand...[9]

3.17The AIIA submission pointed to higher wages as a driver of higher costs
in Australia. The AIIA argued that wages have ‘risen dramatically’ in recent
years – both in absolute terms and in terms of purchasing power, as the
Australian dollar has risen against the US dollar:

As a result, Australian wages are relatively high compared
with workers in comparable markets. The average full-time wage in Australia at
the end of 2010 was $66,594 a year. Converting this to other currencies the
2010 exchange rate gives an average wage in Australia of US$68,370, £42,580 or
€48,500. In comparison, the average full-time average wage in these
countries/regions was: USA: US$44,980; UK: £25,355; Germany: €42,535.[10]

3.19The Committee notes, however, that hourly and average wage figures are
not an accurate indicator of total labour costs. In its 2011 Retail Industry
Report, the Productivity Commission concluded that ‘comparisons of minimum
wages provide no real insight into relative retail industry labour costs in
different countries’.[12] The Commission noted
that a range of factors contribute to total labour costs in addition to wages,
including, for example, paid leave and contributions to pension and insurance
funds.

3.20On that basis, the Commission conducted its own analysis of hourly
labour costs in a number of European countries in addition to Australia and the
US. It found that, when wages and benefits (including paid leave, employer
contributions to pension and insurance funds and government social insurance)
were taken into account, hourly labour costs (converted to constant Australian
dollar equivalents and also to US dollar Purchasing Power Parity equivalents to
adjust for relative purchasing power) were lower in Australia than in the US.
When calculating labour costs as a proportion of retail sales, however,
Australia was slightly more expensive than the UK and the US.[13]
The Commission therefore came to the conclusion that labour costs were indeed
higher in Australia as a proportion of revenue, even if they were comparable or
lower in absolute terms.

3.21Retail rents and occupancy costs were also cited as factors affecting
the cost of doing business in Australia. The AIIA argued that rent costs, while
‘not usually directly related’ to AIIA members’ expenses, nonetheless affect IT
pricing, because a significant proportion of their services are sold through
channel partners. Ms Campbell said that rents ‘have a profound effect’ on
channel partners:

… a very significant part of their operations is in both the
retail outlet and more specifically and generally in wholesaling operations.
These costs are real and they are understood to be contributing significantly
to the increase in costs in Australia.[14]

3.22Mr Zimmerman of the ARA argued that while there had been some recent
reductions in retail occupancy costs, retailers were nonetheless forced to pay
too much rent for business premises:

It is very well documented that rents in Australia are artificially
set high against places like the US and Europe.[15]

… labour costs and rental expenses can be as high as 70 per
cent of the Australian retail industry’s operating costs — high by global
standards.[16]

Warranties

3.24Several submissions to the inquiry made the claim that the warranty
provisions of the Australian Consumer Law (ACL) contribute to high IT prices in
Australia. Ms Campbell, of the AIIA, stated that warranty costs in Australia
are as high as anywhere in the world, characterising the warranty scheme
created by the ACL as:

… a very expensive scheme. The warranty provisions speak to
the reasonable life of the product. That could be three years in the case of
some of our members’ products. That makes the provision of warranty for those
products very expensive in this market.[17]

3.25Ms Campbell added that:

One of my members has reported that, from their experience,
our consumer warranty environment is the most expensive that they are dealing
with in the world.[18]

3.26In its submission to the inquiry, DBCDE observed that:

Warranties in Australia can be more rigorous and provide
greater protections than those in other countries. The Australian Consumer Law,
a schedule of the Competition and Consumer Act 2010, can provide
different and in some cases stronger protections than that found in US or UK
law. Where goods are faulty, this may result in higher costs for importers than
they might face if they operated in other markets.[19]

Strong consumer protection in Australia means high support
costs for IT vendors. Consumers see it as their rights to return for refund or
replacement even when it is not the manufacturers’ fault. In light of the new
Australian Consumer Law calling for compensation for consequential losses … IT
vendors are finding it very hard to do business in Australia.[20]

‘Green’ schemes

3.28DBCDE also pointed out that IT vendors may incur higher costs as a
consequence of so-called ‘green schemes’ that are designed to encourage the
recycling of used televisions and IT equipment:

Commonwealth, State and Territory and local government
schemes to cover the costs of recycling IT goods can contribute to the costs of
hardware products bought in Australia. For example, the National Television and
Computer Recycling Scheme can contribute to the costs of providing goods to the
Australian market, as it places responsibility on manufacturers and importers to
partake in product stewardship arrangements at their own expense.[21]

3.29The Australian Industry Group (Ai Group) also attributed higher local
costs to environmental regulations, noting that higher costs were in part a
result of:

… environmental regulation such as minimum energy efficiency
requirements and the new National Television and Computer Recycling Scheme,
which imposes significant costs on suppliers of equipment subject to the
scheme.[22]

3.30Ms Molly Lai also noted that the National Television and Computer Recycling
Scheme, ‘making importers and manufacturers bear the burden of recycling’ has
an impact for IT vendors.[23]

Exchange rates

3.31Many consumers have expressed frustration that, in their view, IT
product prices have not declined in response to the appreciation of the
Australian dollar. In addition to submissions to this inquiry, the Committee is
aware of substantial public comment in social media and on the internet where
consumers consistently raise this issue.

3.32The Committee has received evidence suggesting that prices may take some
time to match changes in the exchange rate. As DBCDE noted in its submission
there can be a number of reasons for this ‘sticky’ pricing (in which there is a
delay between currency value changes and the consequent adjustment in prices):

These delays can reflect inefficiencies in the supply process
or where some importers buy stock well ahead of time in order to protect
against currency fluctuations. To some extent, these delays are fixed, for
example where the discrepancy is caused by an overstock of goods purchased at
an earlier, higher price, or where the price is fixed through a long-term
contract. The stability may also reflect lower competition in the Australian
market and/or strategies where vendors seek to add value to products rather
than reduce prices.[24]

3.33Ai Group noted that a number of factors can affect exchange rate
pass-through:

nSupply contracts may
be in place that have fixed exchange rates built into them.

nThe lag time between
the placement of orders for imported products and the sale of the product in
Australia can encompass a number of fluctuations in the spot price.

nMany business costs
are not affected by the exchange rate (for example, domestic labour, freight,
transport, storage and regulatory costs).

nAs suppliers and
retailers generally offer a large number of individual products it would be
impractical to constantly reset these prices based on frequent movements in the
spot price.

nThe desirability for
consumers, suppliers and retailers of having relatively consistent pricing of
goods, smoothing out fluctuations in the exchange rate.[25]

3.34Major IT vendors stated in submissions that their priority was to
provide consistent, efficient and fair pricing rather than to respond to
exchange rate fluctuations. For example, in its submission, Microsoft said
that:

Microsoft’s global policy is to provide consistent and
predictable local pricing while maintaining reasonable alignment of local
currencies relative to the US dollar.[26]

3.35Adobe said that its policy was to set balanced prices:

Both suppliers and customers would like to be able to enjoy
the benefits of favourable currency movements and avoid the costs of
unfavourable currency movements. However, fair and efficient pricing needs to
strike a balance between upward and downward currency movements.

Since most of our business is derived from the
local ecosystem, Adobe has an AUD price list which ensures our distributors can
always purchase from Adobe in AUD. This leaves the foreign exchange rate risk
to be carried by Adobe.[27]

3.36Apple also emphasised consistency in pricing:

Foreign currency is an important variable in how product
prices are compared between countries. It is not uncommon for macroeconomic
factors to cause foreign currencies to fluctuate dramatically during a
product’s life cycle. Over the period of time a particular Apple product is in
the market, it may appear to be either priced higher or lower in a local market
when compared to the price in the United States or elsewhere… The company’s
typical practice in such circumstances is to keep local prices the same,
whether unfavorable [sic] or unfavorable to the company, until
replacement products are introduced. This is less disruptive for local
customers and local business channels than if Apple were to reprice products up
and down on an unpredictable basis in response to all such fluctuations.[28]

Channel partners

3.37Industry groups argued that another factor in higher Australian IT
prices was the margin set by channel partners. The term ‘channel’ refers to the
various conduits through which goods or services are delivered from producers
to consumers.

3.38Microsoft, for example, does not sell directly to Australian consumers,
but rather through various kinds of ‘channel partner’. According to Microsoft
Australia’s Managing Director, Ms Pip Marlow:

We work on a model where we have a channel and that channel
is a little differentiated… we talk about the volume reseller channel. They are
our large-account resellers, value-added resellers. They sell our volume
licensing, enterprise agreements, select agreements, open agreements. We would
then have our OEM [original equipment manufacturer] partners. If you are using
a Toshiba, we would license our software to Toshiba to preinstall into the
product. You would acquire the product through that. [Finally], we have our
retail areas. That would be something like Harvey Norman or JB Hi-Fi, through
to a small, single-proprietary business who would sell what is known as retail
product.[29]

3.39Channel partners, Ms Marlow continued, can deliver different value-added
services to their customers:

… [D]ifferent areas of the channel will deliver different
services to the customers as they consume that product. It might be, as I said,
Toshiba and their channel adding desktop management support for your hardware. It
might be a volume licensing reseller adding deployment services or software
asset management services. It might be a retailer helping the consumer and
being their trusted adviser as they make IT decisions, and they would deal with
support and management of that. Through each channel you would see different
types of value-added services that they would put on as they are sold to the
customer.[30]

3.40Channel partners of major IT companies are, for the most part, based in
Australia. Industry groups argued that the costs incurred in moving products
through the channel are partly responsible for price differences. The Committee
learned from the AIIA that:

Some members have brought to our attention the fact that they
do not set the retail price of their products. These are set through their
partner channel and hence are also influenced by channel specific market
factors and cost pressures.[31]

3.41Adobe, itself a member of the AIIA, observed that:

It is important to understand that around 85 per cent, the
vast majority of Adobe sales, flow through local channel partners. Adobe’s
local channel ecosystem is estimated to employ around 3,000 people in
Australia…. Since we conduct most of our business through our 500-plus local
channel partners, the majority of the costs of the ecosystem as a whole are
incurred locally and in local currency.[32]

3.42Adobe Australia’s Managing Director Mr Paul Robson further noted that
the prices of digitally downloaded products sold directly by Adobe are
‘aligned’ with the prices of physical media distributed through the channel, so
as to protect channel partners’ business:

… in relation to the electronic version of that [product],
there is an exact equivalent of a physical product of it that is sold by our
partners in a channel format. So the pricing generally is aligned to make sure
that the partners can continue to run and operate a business in this country.
Where there is not a product that is an exact equivalent, and that is the case
for the cloud based product, the pricing is in line with that seen in other
markets.[33]

3.43Microsoft also attributed at least some of the higher prices for its
product to locally-ba sed channel partners:

Microsoft provides guidance on recommended retail pricing…
Microsoft does not, however, set the final ‘to-the-customer’ price. The channel
and value-added partners who deliver those products to customers ultimately
determine retail pricing.[34]

Localisation costs

3.44DBCDE noted that IT companies may incur costs in tailoring their
products for the Australian market. This can include adapting a product to suit
local laws and regulations or to better meet Australian consumers’
expectations:

Products which provide customised features based on unique
national characteristics, such as local accountancy practices, a person’s
accent or even the voltage and plug requirements for electricity, will
generally require additional research and/or development work to be sold in
Australia.[35]

3.45The Ai Group further argued that higher costs may be incurred in
complying with local regulations:

In addition to general business regulatory costs such as
taxation and OHS, Australian governments at the State and Federal level
regulate IT products to ensure that they are safe, reliable and minimise their
environmental impact. These regulations and standards impact on price and may
differ from other markets. The sector specific regulations that apply to
Australian IT products can include electrical safety requirements [and]
labelling requirements for radiocommunications and telecommunications equipment
such as the A-Tick and C-Tick Marks.[36]

3.46However, in evidence before the Committee, Mr King downplayed the
significance of localisation costs, at least in relation to Apple hardware sold
in the Australian market:

The product cost may vary slightly market by market. For example,
a computer coming to Australia has a slightly different plug to connect to our
sockets, etcetera, compared to a product going to the United States. There may
be elements like that that would vary on a product bill of material country by
country, but they will be small variations. … [T]he product costs would be
broadly similar. There may or may not be some puts and takes but I think it
will be broadly similar across markets.[37]

3.47Mr Robson placed particular emphasis on the importance of providing
consumers and businesses with IT products tailored to local and individual
needs:

One of the great drivers of the internet is the ability for
organisations to provide a personal and relevant experience. It is an
interesting dynamic. When you actually look at what customers are demanding, it
is experiences that are personalised, bespoke. As one of our technology sets in
our digital marketing business, we work with customers every day to sell them
technology that provides them a personalised, bespoke experience. In a global
marketplace the risk for organisations is to become less relevant, to lose the
relevance of interaction with an existing customer. To drive that relevancy
organisations seek to provide a personalised and bespoke experience.[38]

3.48Specifically questioned on how Adobe localises its products for the
Australian market, Mr Robson responded:

When we look at relevancy around personalisation, that is in
relation to the redirection of customers when they access our website. When
customers access the Adobe.com website they can choose to see whichever website
they wish to see. We automatically try to get them to look at the Australian
site, for a number of different reasons. There is local content. There is
information in relation to local user groups and communities that use our
technology that they can learn from and contribute to. There is information
that is relevant to the local market in relation to Australian based pricing
and other content and information. That content is a richer and more
personalised experience for an Australian customer than they would get if they
accessed a webpage that was in another language or for another country. … with
relation to relevance and personalisation, the personalisation was not of the
product; it was the experience when online.[39]

3.49The following exchange subsequently took place between Mr Robson and the
Committee:

Mr Husic: … What is the local experience, then, that people
are obtaining? What is the benefit of it?

Mr Robson: There is access to user groups, communities,
information, local pricing, local offers et cetera.

Mr Stephen Jones: Chat sites and blog sites?

Mr Robson: Exactly, yes, user communities where—

Mr Stephen Jones: How much are you suggesting we should be
paying for access to blog sites?

Mr Robson: No, I am talking about the personalised experience
when a customer is online with adobe.com. We seek to provide a personalised
environment where they can interact with other users of our technology. That is
how we go to market. One of our key interactions with our customer base is to
allow them to talk amongst themselves and to work with us and to provide input
into future innovation.[40]

3.50The Committee notes the evidence from industry that localisation
represents an additional layer of cost incurred by some international IT companies
selling into Australia. However, the Committee is of the strong view that in
many product categories, particularly in relation to digitally delivered content,
localisation costs would be negligible at best and certainly not account for
the types of price differentials presented in evidence to the Committee.

Responses by product category

3.51As noted in chapter 2, evidence was received across a range of products
including hardware, software and digital downloads including music, games and
books. The Committee acknowledges there are challenges when assessing industry
explanations for pricing, because some evidence in submissions and at hearings
makes little distinction between hardware, and digital downloads; some evidence
refers to an overall approach by business. To that end, responses on certain
product categories are considered below, before an assessment of some broader
business principles.

Hardware

3.52Noting the above observation, that evidence received is often made
across, or on behalf of, a business which sells both physical and
downloadable products, the Committee acknowledges the claims by Microsoft and
Apple on their hardware prices. Apple’s Mr Tony King observed that prices for
recently released Apple hardware and software products are now near parity with
prices in the United States:

Setting aside the daily ups and downs of currency exchange
rates, our Apple product prices here in Australia are not materially different
from the Apple products sold in the United States. In fact, today the price for
the new iPad with retina display and the iPad Mini are within one to five per
cent of the prices in the US. The same is true of Apple’s own software titles
offered on the Mac App Store, including Final Cut Pro, Logic, iPhoto, iMovie
and GarageBand. These products are all priced in Australia within one to three
per cent of the prices in the United States.[41]

3.53Ms Marlow, noting that variations in the price of Microsoft products
should be expected since the company does not endeavour to set a single, global
price, observed that the Australian price for some recent Microsoft products
has been much closer to the US price:

[Microsoft Office] Home and Premium costs $119 here,
including GST, and $99 in the US without tax. Office 365 Small Business Premium
costs $13.50 a month here, $15 a month in the US. Office Home and Business for
small business costs $299 here, including GST, and $219 in the US…. Office Home
and Student 2013, which is the current version of the software, is $169.00 ERP
here including GST and $139.00 in the US. So our price includes GST and the US
price is without that … . But ultimately we do not have a global price and the
prices may be different in the US or other jurisdictions.[42]

3.54As noted earlier in this chapter, while the Committee accepts views that
prices may be generally lower, it notes that in some cases, the relative
or proportional differential may be unchanged. That is, while costs are
becoming lower in Australia, they are becoming lower everywhere;
Australians are still bearing a proportionally high cost burden.

Software and digital downloads

3.55Much of the evidence from IT vendors on software made little or no
distinction between physical and digitally downloaded products. Further to the
above consideration of explanations for higher prices for Australian consumers,
the Committee sought to better understand the distinctions made for products
which are essentially identical.

3.56As outlined in chapter 2, many consumers expressed concern at price
disparities for digitally delivered content, including software, music, games
and books. The Committee considers this to be an area of special interest as
many of the justifications for higher prices made by industry groups are
arguably less relevant to digitally downloaded products. Many products sold
online, for example, would appear to incur significantly reduced wage costs,
much lower occupancy costs, and undergo little or no localisation (none at all
in the case of music, movies and many e-books). The Committee is therefore
especially interested in why these products still cost Australians more.

3.57The Committee has heard differing views on the pricing of these kinds of
digitally delivered content. For the most part, consumers expressed frustration
and disbelief at having to pay significantly more for a substantially identical
downloaded product, when in their view the vendor incurred no higher costs in
providing it. A representative sample of the views of concerned consumers
expressed in submissions is presented below. Mr Stephen Delvecchio argued in his
submission that digital distribution removes any reason for differential
pricing:

The argument of increased costs due to shipping physical
goods from overseas died the day we entered the digital age – many years ago.
There is absolutely no reason why I should be charged up to $50 more for the
exact same 1’s & 0’s that are purchased from the exact same store just
because I happen to have an Australian accent. The word absurd doesn’t even
come close to describing it.[43]

3.58Mr Samuel Lymn argued that:

… in all cases, when discussing digital product pricing, one
can make no claim about increased costs for the retailer on the basis of things
associated with preparing a physical product for sale. The fact that the
product is digital completely eliminates such considerations.[44]

3.59According to Mr Duncan Wallace:

It could be argued that shipping and costs of operating
physical retail stores in Australia cause prices to be higher. However, this
does not apply to digital downloads of software.

In most cases, the customer is downloading exactly the same
software, from exactly the same servers as other customers around the world.
The customer also bears the expense of any bandwidth costs for the actual
download.[45]

3.60Although the above are only three examples of many received, in this
section the Committee canvasses the arguments made by IT companies and vendors
in response to specific sectoral claims. The Committee acknowledges the view of
Microsoft that even in the case of digitally distributed content, a vendor’s
costs may remain high:

Software that is delivered via an online portal offers the
potential for reduced transaction costs for vendors in the way of distribution
costs. Nevertheless the costs of providing the services - including
establishing, maintaining, supporting and advertising the services - needs to
be recovered and a profit from those operations derived.[46]

Music

3.61The Committee heard conflicting views on who controls the price
Australians pay for music, movies, books and other copyright content. While
many submissions were highly critical of Apple’s Australian iTunes store
pricing, Apple argued that the prices of music sold through that store is
dependent on the wholesale prices set by the music labels:

The pricing of music, movies and TV shows on iTunes is
determined by various factors. Prices are heavily influenced by the wholesale
price set by the labels and studios, royalties payable for the use of musical
compositions and the incorporation of local taxes.[47]

3.62Mr King told the Committee that:

The iTunes store is a digital media store. Apple must pay the
rights holders of the digital content—the record labels, movie studios and TV
networks—to distribute content in each of the territories in which the iTunes
store exists. The pricing of this digital content is based on the wholesale
prices which are set through negotiated contracts with the record labels, movie
studios and TV networks. In Australia they have often set a higher wholesale
price than the price of similar content in the United States.[48]

3.63After many attempts to seek input from the Australian Recording Industry
Association (ARIA), the Committee was advised that:

ARIA has no relevant information on how music prices are set
in the Australian market. ARIA is not involved in the setting of wholesale or
retail prices in the music industry - ARIA does not supply music to retailers
or consumers. Nor does ARIA have access to information about how record
companies or music retailers set their prices. It would therefore be
inappropriate for ARIA to comment on price.[49]

3.64In its efforts to establish reasons for the apparently vastly higher
costs to Australian consumers to access digitally downloaded music, the
Committee had sought information from the Australian royalty collecting
agencies, the Australasian Performing Rights Association and Australasian
Mechanical Copyright Owners Society Ltd (APRA-AMCOS). The Committee heard from
Mr Richard Mallett, Head of Revenue, that:

… it is public knowledge that out of each sale of a single
track download the DSPs [Digital Service Providers] will generally keep up to
30 per cent, the record labels will receive between 60 and 70 per cent and
APRA-AMCOS receives nine per cent. APRA-AMCOS’s rate in Australia is similar to
tariffs in operation in other territories. For example, in the UK and Europe it
is eight per cent, in Canada it is nine per cent and in the USA it is US9.1c,
which is a fixed rate irrespective of sale price.[50]

3.65Given the ‘public knowledge’ of this matter, the Committee was therefore
surprised to hear from the Managing Director of ARIA, Mr Dan Rosen, that in
relation to the division of the revenue obtained from music sales:

I think that is something that is split between the retailer
and wholesaler. I do not know the details of that split. Then, within that, I
do not know how they split that up. I would assume each artist has their own
relationship and have a contract with their label on how that gets divided…

I think you would need to speak to a range of retailers,
because there is an enormous number of different retailers in Australia, and a
range of rights holders. Some of those rights holders would be in Australia and
some of them would be overseas.[51]

3.66The Committee continued to seek accurate and transparent advice as to
pricing, and invited submissions from rights holders. Universal Music Australia
(UMA) maintained in its submission that prices were set by the retailer:

The retail price charged to consumers by Australian digital
providers is set by the particular digital provider. UMA has no say in the
setting of that retail price. UMA provides its content to retailers according
to wholesale price rate cards. UMA has rate cards that apply to physical
records and rate cards that apply to digital content. The rate cards set out
the prices of the different album and track pricing tiers with multiple tiers
being offered. Rates for campaign discounts, which are commonly demanded by
digital retailers as a condition for including particular products within a
promotional campaign, are also included. There are further categories for
deluxe products, compilations and video products.[52]

3.67Representatives of the Australian music industry also claimed that, even
though much of their product is digitally distributed, the industry still
incurs costs which must be recovered. ARIA argued that:

… the contention that digitally delivered content by a local
company with an international parent is identical and should therefore cost
consumers the same in Australia as in the US or some other country is
unfounded.[53]

3.68According to ARIA, Australia-based national affiliates ‘must run as a
viable business in their own right to optimize their activities in the
interests of their shareholders (be they overseas parent entities or domestic
individuals)’.[54] Mr Rosen stated that
record labels incur many costs in producing music and that the idea that
digitally delivered products are cost-free is an ‘incorrect assumption:’

I think that is a misconception because in Australia these
businesses are running with local costs—wages, property and, importantly,
marketing. There is also what we in the music industry call A&R. This is
the R&D of the music industry which goes into sourcing local talent… This
is an incredibly important part of what the label members do in Australia. It
is a costly exercise and it is something that they are doing in this country.[55]

3.69Universal Music Australia outlined its costs in this way:

UMA invests heavily in Australian artists as well as
providing significant funding to a number of independent Australian labels. In
addition, the company carries substantial labour and operating costs. All of
these investment and operating expenses must be covered by UMA’s local
revenues. In addition, once an artist’s album has been recorded, UMA must
invest heavily in the marketing and promotion of such album. It is vital to an
album’s success for UMA to achieve local media support including radio play,
videoclip play and online exposure. UMA also invests heavily in television and
radio marketing campaigns.[56]

3.70As mentioned in chapter 2, the Committee is aware of the emergence of streaming
services in the music market. In October 2012, Mr Rosen advised the Committee
that eight or nine services, including Spotify, had been launched in the
previous 12 months.[57]

3.71Apart from describing the growing number of choices for consumers to
access content, music industry organisations have argued that the cost of music
in Australia has fallen significantly over the past decade, as have revenues of
record companies and the music industry more generally. UMA argues that
recorded music in Australia is ‘cheaper than ever’.[58]

3.72UMA claimed that revenue had more than halved in the period 2003-2011,
as a result of the ‘prevalence of illegitimate music downloading and streaming
platforms’, which has led to a decline in the willingness of consumers to pay
for music.[59] ARIA cited the
‘abundance of free or near-free services’ as a factor driving down prices, but
considered the impact of copyright infringement to be of primary importance:

Australian consumers have access to a plethora of unchecked
and unregulated web-based suppliers that offer a very wide range of pirated
music at no charge. Digitalisation has enabled piracy on a massive scale, so
much so that the wholesale revenues of record companies have been almost halved
in the last 11 years … Piracy accounts [for] a significant amount of the music
consumed in Australia today.[60]

3.73Copyright issues are considered further in chapter 4.

Games

3.74As discussed in chapter 2, submissions from many consumers referred to
the often significant price disparities imposed on Australian gamers when
purchasing through digital distribution platforms like Steam.

3.75Mr Matthew Kermeen found it ‘highly perplexing’ that games should cost
so much more in Australia when purchased through digital distribution
platforms. Mr Kermeen expressed frustration at paying ‘almost double the price
for the exact same product, delivered in the exact same manner’, when
localisation and distribution costs should be close to nil.[61]

3.76In relation to the game Diablo 3, which cost more than 30 per
cent more in Australia than in the US, Mr Zhiliang Huang wrote that:

There is no difference in the way the game is delivered (by
download) between a U.S. buyer and an Australian buyer.

The game will [also] be played [on a] U.S. server and there
is no difference in the way the game will be played (on battle.net) between an
U.S. buyer and an Australian buyer.[62]

3.77Mr Mark Sinclair summed up consumer frustrations in this way:

The big issue many Australian gamers have is the variation in
price that we pay compared to other gamers in other parts of the world, no
transport costs are necessary, every time a purchase is made you are only
copying a file from a server, no additional production of disk or packaging is
required, no additional cost to steam is incurred because we are across the
Pacific, transport of the product is covered by the Australian consumer by our
download allowance in the contract we have with our internet service provider,
we also have a free trade agreement with the US.

We are buying a product from this company in exactly the same
manner as a US citizen, yet we Australian customers can pay up to double the
price.[63]

3.78The Committee notes no representatives from the gaming industry chose to
address this issue.

Books

Australians are downloading the e-books from exactly the same
place as the rest of the world. It’s not as if the books sent to us through our
internet connections magically increase in cost depending on where in the world
it moves to. It’s just bytes of data, 1s and 0s, identical and completely
oblivious to a consumer’s geographical location.[64]

3.80Ms Julie Jester concurred, noting that:

e-books do not have the costs associated with printing,
distribution and retailing. Once an e-book is formatted, a single copy can be
stored on a server anywhere in the world and distributed electronically at a
trivial cost.[65]

There is no such thing as ‘an Australian Amazon website’.
Buyers from every country, including Australia, all buy and download e‑books
from the same USA-based Amazon internet book store at www.amazon.com. There is
therefore no technical reason for higher pricing of e-books for Australians.[66]

3.82Representatives of the Australian publishing industry indicated that
publishers have ongoing costs regardless of the format their books are
published in. Mr Ross Gibb of MacMillan Publishers Australia said:

… e-books cost so little to produce, so why are they not
cheaper than what they are? In our business an e-book is just another format;
it is not a separate stand-alone product. So the full cost of paying the
author, commissioning writers and content, editing, designing, and marketing
all still exist. These costs will not go away, even as the e-book market grows.[67]

3.83Mr Gibb told the Committee:

Today in the US, a market that is about three, possibly four
years ahead of our market—it is very hard to tell with technology—e‑books
account for 16 per cent of total book sales. So 84 per cent of the book market
remains in paper and the costs to maintain that business still exist. It is
true there is no print cost in producing an e-book and there is no freight cost
but digitising content, file and data storage, file distribution by third
parties, and managing and combating piracy bring new costs to the business.[68]

3.84As in the case of digital music, the Australian Publishers Association
(APA) also emphasised the regional nature of markets:

Profit margins on each e-book sold can also vary from country
to country, depending on factors such as royalty structures, hosting costs,
technical support provided by a publisher and the extent to which a book needs
to be adapted and enhanced to suit each country (a particular concern in
relation to educational publishing). [M]ost publishing of Australian titles is
done on the basis that costs must be recovered in Australia, as the largest
market for Australian titles.[69]

Policies and approaches to pricing

3.85Noting discussion to this point about impacts on costs in Australia, the
Committee took a general approach to ascertain overall views of businesses to
issues which may affect pricing decisions. Matters considered include
observations on pricing models; elements of competition and choice; and
managing a market (including through subscription models and geoblocking). The
Committee notes Mr King’s views that price discrimination begins at the
wholesale level, and his argument that Apple would lower prices if it could:

When you boil it all down, where may a price differential
arise? It is in the difference in the wholesale price to the retailer. The
other costs are either variable in nature, such as the GST, or comparable in
nature like the publishing fees or the iTunes store management costs…

We would love to see lower content prices, be it for songs,
movies or TV shows. That would drive a wonderful use of our products within the
Australian market. I want to make it absolutely clear that it is in our best
interests to see that take place.[70]

Approaches to regional pricing

3.86Mr King responded to a question about price discrimination and companies
charging ‘what the market will bear’ in the following terms:

We do, and have, for as long as I can remember run an overall
model where we offer equivalent pricing on our products around the world. We
establish that equivalent price at the time we introduce a product to a market.
… Simply put, we offer an equivalent pricing model rather than the model you
are suggesting about what a market may bear. We start with a US denominated
price. We do take into consideration some costs of doing business in a market.
That may be in the area of freight. The per unit freight charge of an iMac, for
example, is more expensive to bring into the Australian market than it is to
other markets.[71]

3.87Mr King subsequently explained that Apple ‘set[s] our prices worldwide
from Cupertino with input from the local team for factors that may be relevant
for the Australian market. We have a global equivalent pricing model that is established
at a worldwide level.’[72]

We establish a price on the Apple online store and through
our retail stores for a product, but our partners are free to set their prices
as they see fit in the market. Indeed, in any given week or month we see very
highly competitive offers taking place with our channel partners across
Australia. We have 6,000 sites that are within our rich ecosystem, and our
partners are constantly driving innovation around the way that they provide
value to customers. That will manifest itself in anything from a bundle to an
offer and in some cases a discount, but that pricing is purely in the court of
the retailer. It is their decision.[73]

3.89A different approach to pricing was set out by Adobe’s Mr Paul Robson.
In his evidence to the Committee, Mr Robson outlined a pricing strategy which
is not global but regional in nature:

… Adobe seeks to set prices in this market here in Australia
that provide a consistent contribution, taking into account the cost of doing
business in this region and allowing us to run a regional operation. We do this
in most markets around the world while at the same time trying to provide some
uniformity across those regions.

…If customers do not feel that they are getting good value,
they simply will not buy our products. Price is the key to competitive
advantage which in turn underpins the global trading system.[74]

At Microsoft, whilst we operate in over 100 countries around
the world, we do not operate on a single global model. In fact, the countries
that we operate in are very different, and therefore the way that we compete
and the way that we deliver products and services every day in those countries
can be unique. In those spaces, we work to make sure that we understand our
customer’s needs and the competition and, therefore, have a unique strategy, be
it in the different countries or given the different competitive landscape that
we have.…

[W]e do not operate under a single global market model and
there are a range of factors that do impact the way that we go into market.
They may start with cost structure, customer perceptions, partner choices but
most importantly the competition that we have in market.[75]

3.91Ms Marlow later elaborated on this point:

We do not operate on a standard price because we do not
believe that every market is the same. We may be selling to an emerging market,
for example, where the cost of living, the availability of technology, the
ability of customer perception and the competition might be completely
different. … We do not set them on a global market. We know that, in the end,
because we are living with competition, our customers will vote, as I said
before, with their wallets. If we make the price too high in that particular
market, they have choice and they will look elsewhere. We respond to that.[76]

3.92The Committee received evidence from the Australian Home Entertainment
Distributors Association (AHEDA) stating that:

The terms of the Inquiry seem to suggest that there are
regional retail price differentials which are attributable to the pricing
practices of international suppliers (ie wholesale pricing). However, retailers
set their own pricing and average retail DVD prices suggest that they are
broadly on par with those in Europe.[77]

Competition

In a market where there is supply and demand in a free
economy, yes, absolutely.[78]

3.94Competition within a free market, and the ability of consumers to make
their own purchasing decisions was a common theme of IT vendors. Ms Marlow
described the company’s operation in a global free market:

We would say that, in the free market, you are going to see
pressures come from competition and different areas, and we will continue to
compete.…

I believe we are not operating in a global economy where
organisations need to have a global price. I believe companies should be able
to lawfully set prices differently across the market that works for their
business strategy, works with the different investments they make in those
different markets, works based on the competitors they have in those markets
and on the customer perceptions in those markets in a true supply-and-demand
manner.[79]

3.95Both Microsoft and Adobe argued that consumers and businesses can always
turn to other products if their customers believe their prices are too high. Ms
Marlow said:

[S]mall businesses in this country have choice. There are a
plethora of products they can use. There are other products that they can use
today for similar functions, and they have a choice to make. We operate in the
market very lawfully. We are out there competing every day on price and on the
service of product. …

If we price our products too high, then our customers will
make different choices.[80]

3.96Asked by the Committee about customer perceptions of Microsoft charging
Australian users of one Microsoft product more than 70 per cent more than users
in the United States, Ms Marlow argued that the key issue was customer
perception of Microsoft’s products:

We look to measure our customer’s delight and satisfaction
with our company’s products in a lot of ways. Often that is through sales.
Every day we are out there selling our product, making sure that as you are
using the variety of hardware that you have in front of you now that we are an
eligible and competitive offering for our customers. Ultimately, the choice and
the decision for customer satisfaction and delight is for the customer. I think
the role of a free market and a company is to be able to then go out and
compete every day to do that, to make sure that we through our products,
through our support mechanisms and the things that we do every day when we are
competing are the moment of value for our customers.[81]

3.97However, in response to the suggestion that software vendors create
‘digital handcuffs’ that prevent consumers and businesses from switching to a
competitor, Ms Marlow said:

Most of our software programs are built with interoperability
in mind, so you can use tools to transfer data and technology. … We have to
keep building on those products, keep making sure we compete and innovate, keep
making sure that we deliver the value they want, because they do have those
choices in this market.[82]

3.98However consumer groups argued that market forces are rather less than
perfect in relation to IT products. As the Australian Communications Consumer Action
Network (ACCAN) observed in its submission to the Committee:

Software has different economic properties to many other
products. Due to compatibility issues, unless there are uniform standard
allowing multiple software products to access and edit files from different
programs, the value of software increase with the number of people using that
product. Market power then tends to reside in a few powerful organisations.[83]

3.99ACCAN elaborated, using Adobe’s software products as an example:

Adobe has significant market power due to its importance to
creative industries. It also structures products in such a way that requires
regular investment (through purchasing upgrades and linking products) that make
the cost of switching to another piece of software more expensive. This market
power would appear to allow Adobe to undertake international price
discrimination to the detriment of Australian small business, many of whom have
little choice about what product they are able to purchase.[84]

Managing markets

Cloud and subscription services

3.100In evidence to this inquiry, industry groups highlighted the utility
cloud services offer for consumers and businesses, especially the potential to reduce IT support costs
for businesses and consumers by outsourcing hardware and software maintenance
and support. According to the Australian Industry Group (Ai Group), for
example, cloud computing enables monthly or annual pay-as-you-go pricing models
for customers which can be scaled up or down flexibly depending on customer
demand.[85] AIIA CEO Ms Suzanne
Campbell similarly argued that the cloud provides pricing advantages for
Australian consumers and businesses:

Cloud presents opportunities. In relation to pricing, cloud
based pricing for a product means that consumers no longer need to secure a
licence to own the product outright; they can use it on an as-required
basis—pay as they go or pay per month. So that is one innovation that comes
with cloud. More generally, as a business model, the enabling capacity of cloud
relates to lower capital costs, easier access to platforms—and is a
particularly significant opportunity for SMEs.[86]

3.101Mr Robson repeatedly expressed Adobe’s view that its cloud-based
subscription service – called ‘Creative Cloud’ – provided significant
advantages for Adobe customers including more frequent software updates instead
of an annual or biannual version release (as is the case when purchasing
perpetual-license software):

… Creative Cloud provides access to continual updates,
enhancements and new features of our technology over time… if you bought a copy
of Photoshop prior to there being a new operating system in the marketplace or
prior to there being a new piece of hardware, such as a tablet or a smartphone,
the technology that you purchased would support the technology that was available
in the market at that point in time. It is a snapshot of the tech landscape.
But by being able to provide a Creative Cloud offering it allows us to then
provide enhancements and updates to customers throughout all innovation across
the technology landscape. So as other vendors bring hardware or new operating
systems to the market our customers get recurring updates and enhancements to
our technology.[87]

3.102Mr Robson went on to highlight special features available to customers
via Adobe’s cloud services:

We add features to Creative Cloud that we technically could
not offer otherwise. Some features exist in Creative Cloud that you would not
get access to if you were to buy a box product, including collaborative
services that allow you and I, for instance, to share files and information. It
allows us to provide storage to our customers. It allows online storage. It
allows them to easily share that content with other parties. It also allows
them to sync across multiple devices.[88]

3.103Mr Robson argued that price differentials for new Adobe products are
much lower than in the past. In particular Mr Robson highlighted prices for
Adobe’s ‘Creative Cloud’ subscription-based service:

Creative Cloud was launched in April 2012 and we have been
monitoring and reviewing its performance in markets since its launch. Last
month we made the decision to change the monthly price of creative cloud to
$49.99 on an annual subscription basis. This brings the price in Australia
broadly in line with the price in the United States. Historically the price of
our student and teacher offering for this cloud based service has been lower in
Australia and New Zealand than in most markets around the world and is priced
at $24.99.[89]

Geoblocking

3.104The practice known as ‘geoblocking’ has been discussed earlier. The
Committee notes that many major IT companies regard geoblocking as a legitimate
tool which allows them to set prices in regional markets. Mr Robson
explained that:

I am sure you are all aware that geoblocking is a
well-established and legal practice seen across many industries. At Adobe we do
direct our customers to country-specific websites via what we call ‘automatic
redirection’. We do this for a variety of reasons, including the ability to
recover the costs of delivering a local, personalised and relevant experience
for customers. Our customers expect to see marketing, discounts, post-sales
support and other information that is customised to their local market. We also
do it to ensure that we comply with local legal requirements.[90]

3.105Ms Marlow outlined Microsoft’s approach to geoblocking in the following
terms:

We do use geoblocking as a lawful mechanism to manage our
business, as some of our competitors and other companies do. …We use
geoblocking in a number of different ways. We would use it to ensure we comply
with local ratings for games. In different jurisdictions and geographies games
will have different ratings, so we will make sure that we manage to that. We
would use it to manage licensing arrangements on content, which differ from geography
to geography. We would use it to make sure that we can adapt our business
strategies, which might be different from geography to geography. And we would
do it to understand what is happening in our own local geographies to make sure
that we can make investment decisions to support the consumer demand in those
different types of geographies.[91]

3.106Issues surrounding the use of technological protection measures (TPMs)
and geoblocking will be explored in further detail in chapter 4.

Consumer views on cost claims

3.107The Committee heard evidence from consumers and consumer groups which
disputed industry evidence in relation to higher costs. The Choice submission
made the following assessment of the likely impact of these costs on the price
of IT products in Australia:

There is no evidence that factors such as wages and labour
costs, occupancy costs and rent, GST, retail profit margins, and logistics and
transportation can, even cumulatively, account for some of the price
differentials identified in IT hardware and software products.[92]

3.108Mr Matthew Levey from Choice elaborated on these conclusions in evidence
before the Committee:

I do not think we deny that there are factors which are
specific to doing business in Australia—I am sure there are, just as there are
factors specific to doing business everywhere—but on the basis of what has been
put forward, whether it is rent, marketing, labour costs or GST, we do not
think that the proportionate higher costs of doing business in Australia in any
of those areas can amount to a 50 per cent or greater price difference.
Therefore, the only place we can look to is the wholesale cost of that product,
which would be set by the manufacturer, the international copyright holder of
that product.[93]

3.109In relation to the idea that costs associated with warranty support are
driving the price of IT goods up in Australia, Mr Levey argued that there is
evidence that Australian retailers can combine low prices with strong warranty
support:

… when you look at some parallel importers like Kogan, the TV
parallel importer, who, as far as we understand it, has an extremely strong
refund/return policy you will see that, even though the goods that it is
selling are parallel imported so you would assume not covered by that
manufacturer’s domestic warranty requirements, it obviously shows it is quite
possible to operate here profitably, sell a lot of products and still offer
significant price savings compared to what, if you like, the official supply
chains would provide.[94]

3.110Some consumers met the notion of warranty and aftersales support costs
driving higher prices with scepticism. According to Mr Magnus Stensson:

I would argue that Australia generally has the worst warranty
service in existence. I buy IT hardware from the US or Hong Kong and get better
warranty than here, where the trend is to make things as complicated as
possible.[95]

3.111Mr Christopher Shain also expressed doubts at the extent to which
warranty costs could contribute to higher IT prices, in particular pointing to
the trend toward offshore technical support centres:

There are obviously some examples where getting physical
support may incur extra costs, but often to nothing like the extent of the
price disparity.

For software products particularly, if the service and
support was any different, of better quality or easy to obtain then I could understand
a price difference, but my personal experience over many years in getting
support and backup for professional imaging software related issues is that I’m
usually not speaking with someone that’s located in Australia anyway.[96]

3.112Evidence from consumers also notes that the multinational IT companies
with which they do business are able to amortise many of the costs listed above
by operating centralised support, billing and distribution services from a low cost
offshore location. Mr Graeme Kitney also expressed doubts at the extent to
which local costs could influence the price of his Adobe software:

Last year I wanted to upgrade my Adobe Acrobat and Adobe
Photoshop Elements and went to their web site for the price and to order the
upgrades. When I put in my address it directed me to their Australian site and
the price increased two and a half times.

However this wasn’t the end of my annoyance with Adobe, when
the software arrived it had been posted from Singapore and I was billed from
Dublin.[97]

3.113The Committee remained intrigued throughout the inquiry with
regard to the apparent mismatch between industry statements and actions:
industry organisations stated a willingness to assist the Committee but
demonstrated a clear reluctance to do so. The Committee observed similar
attitudes towards addressing consumer perceptions. In noting negative customer
feedback, Apple’s Mr Tony King told the Committee that:

We are acutely aware of customer feedback in general. …[W]e
are acutely aware of headlines that might be reported in the newspaper, or a
letter we may receive from a customer who is concerned that a song price on
iTunes in Australia may be more than in the US. I have a very frank and candid
dialogue with my counterparts in the US to make sure that they understand this.
Indeed, at a global level, within our iTunes teams, we do pass the observation
to the global head office of a music label that we are hearing comments in
Australia that frankly make us uncomfortable.[98]

3.114The Committee notes, however, that according to Dr Matthew Rimmer, an
academic from the Australian National University, in relation to e-books and
software sold through Apple’s app store, content is sold under an ‘agency
agreement’, according to which prices are set by the publisher or rights
holder. In these cases the retailer acts as an agent and takes a percentage of
each sale, but does not set the price. According to Dr Rimmer, Apple and a
number of publishers are subject to an antitrust investigation in the United
States as a result of price fixing concerns arising from the agency agreement.[99]

Committee comment

3.115Submissions to the inquiry indicate that Australian consumers have
developed a strong impression that they are the subject of international price
discrimination, in which overseas suppliers of IT products charge Australians
substantially higher prices without obvious justification other than that it is
‘what the market will bear’. The Committee shares this view.

3.116The Committee acknowledges that there are factors specific to the
Australian market which can make it a higher-cost environment for IT vendors
compared with other markets. Australia’s population is comparatively small and
spread over a large geographical area, which means that higher distribution,
wage and occupancy costs must be covered by smaller unit sales than in a market
like the US. There are therefore many products, primarily hardware products or
those with a physical distribution model, for which costs are indeed higher
than in comparable overseas markets.

3.117That being the case, however, the Committee is of the view that in many
instances these higher costs cannot, even cumulatively, explain the price
differences consumers experience in relation to many IT products, and
especially those delivered via the internet.

3.118The Committee notes the views of some industry groups and major IT
companies that price differentials are narrowing. The Committee also notes that
the AIIA submission acknowledged that international price discrimination is practiced
by some of the AIIA’s members as a matter of course. The AIIA referred to this
practice as ‘a common business strategy necessary to maximise performance in a
specific high-cost market such as Australia’.[100]
The Committee is therefore disappointed that the AIIA has confused the issue by
disputing the validity of consumers’ price comparison data and by offering
alternative claims about higher costs that may contribute to price
differentials.

3.119The Committee’s view is reinforced by statements made by government
and industry groups which characterise regional pricing differences as a tool
used by IT companies and rights holders to maximise profit. The Committee
acknowledges the argument made by IT companies that regional pricing
arrangements are a legal business strategy and that companies making such
arrangements are subject to competitive market forces. The Committee notes that
Microsoft and Adobe both rejected the notion of a global market place and
explicitly acknowledged that their pricing strategies reflect judgments as to
what particular regional and national markets will bear.

3.120The argument that ‘sticky’ exchange rates continue to affect prices became
less persuasive as the inquiry proceeded. The Committee considers that price
disparities that persist two years after parity with the US dollar are no
longer explicable entirely by reference to exchange rates. Although the
Committee is aware that a range of IT products, including Apple hardware, is
now priced much closer to parity with the US, it notes that significant price
discrepancies remain across a range of product categories.

3.121The Committee notes the evidence provided by Apple Australia Vice
President Mr Tony King to the effect that localisation costs for IT hardware do
not represent a significant additional cost.

3.122The Committee notes that despite industry claims that costs exist for
the creation and marketing of digitally distributed content, vendors have not
produced any evidence to explain why differentials are so high for such
content. In relation to games, for example, the Committee has not received any
evidence which explains why it is almost invariably cheaper for Australian
gamers to purchase and ship physical media from the United Kingdom to Australia
than it is to purchase a digital copy of the same game.

3.123The Committee notes the suggestion from industry groups that price
differences are in some way ameliorated by ‘non-financial value’ provided to
consumers through discounts, convenience, or after-sales service. The Committee
received many submissions from consumers and small businesses upset at what
they saw as unfairly high prices, and who did not feel adequately compensated
by the ‘non-financial’ aspects of their transactions. Although the Committee
acknowledges that in some circumstances, non-financial factors may influence
purchasing decisions, it is clear that in many circumstances they do not.

3.124Given the evidence presented to the Committee of very large price
differentials, it is difficult to avoid the conclusion that these practices
amount to international price discrimination to the clear disadvantage of
Australian consumers and businesses.

3.125The Committee acknowledges that there is competition in the sale of IT
products, however there are also significant barriers to competition and
choice. Rights and their control also need to be considered. Copyright,
competition and access are explored in the next chapter.